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Midweek Sector Update: G7 Plans To End Fossil Fuel Era This Century

The Group of 7 (G7) nations met in Bavaria on June 8, and pledged to rid the global economy of fossil fuels by the end of the 21st Century. “We are committed to the fact that during the course of the century we want to see the decarbonalization of the world economy,” German Chancellor and G7 Summit host Angela Merkel told reporters. The joint declaration has no teeth behind it, and amounts to just words on paper, but it is the first time that the industrialized world has officially called for an end of fossil fuels in their entirety. The statement also was intended to add momentum to the international climate change negotiations set to take place in Paris at the end of 2015.

While the long-term outlook for oil and gas remains strong, if uncertain, the speed with which the international community – both private and governmental – has turned away from coal is breathtaking. The global divestment campaign is picking up pace, and while the budding movement has claimed some victories against fossil fuels in general, coal has felt the damage more acutely. In a recent example on June 5, the Norwegian parliament finalized a plan to largely divest its $890 billion sovereign wealth fund from coal assets. Even the oil majors are now trumpeting their use of natural gas as an alternative to coal. Put another way, the growing political urgency to deal with climate change has pitted disparate fossil fuel interests against each other, and coal appears almost certainly to be the loser. The jury is out on whether or not politicians will have the strength to take on oil and gas, however. Related: More OPEC Oil Coming When Iranian Sanctions Removed

The G7 summit also renewed its sanctions on Russia over the latter’s role in fomenting violence in Ukraine. There had been questions over whether or not the European Union would have the stomach to keep up the sanctions regime on Russia. The New York Times analyzed how Russia has used political influence and financial assistance to peel off support in Europe, by injecting cash into both right and left wing parties.

The purpose of such political meddling is to drive a wedge between and within European countries over support for tough action against Russia. Russia may have scored some success, but the rollover in sanctions, plus the promise to “take further restrictive measures in order to increase cost on Russia should its actions require” is a rather bold response from the G7. At the same time, the group also said it would be willing to back off sanctions if Russia showed tangible signs of implementing the Minsk accord signed in February. While not necessarily affecting oil and gas markets directly, the rather strong statement from the G7 likely ensures a further dragging out of the standoff.

The EIA released new data pointing to a deeper, although still slow, contraction in US shale production. The agency predicts that the major shale regions of the country will see oil production fall by 91,000 barrels per day in July. The Eagle Ford in South Texas will account for more than half of that drop off with a fall of 49,000 barrels per day. The slowdown comes after production dropped for the month of June as well. At the same time, the fall in rig counts seems to be leveling off. Rig count declines numbered 10 or fewer over the last four consecutive weeks. Because there is a significant lag between the decline in the number of rigs in operation and a resulting fall in production, it is possible that production levels will continue to dip even as rig counts stabilize. Related: Price Manipulation In The Oil Markets?

The ongoing contraction is still costing the industry jobs. The latest employment figures showed that 16,900 jobs were eliminated from companies that provide support services for oil drillers, on top of an additional 500 job losses in direct oil and gas production. The job losses come as the broader US economy continues to add hundreds of thousands of new jobs each month.

Canada’s oil sands continue to feel the pain of the downturn. Along with high costs, the industry has faced well-documented infrastructure hiccups. But the Keystone XL pipeline is not the only bottleneck. A lesser known transit route has been to move crude by rail to a port in Albany, New York. From there it is processed before being shipped out by tanker. But one US petroleum shipper, Global Partners LP, has run into trouble there. New York regulators have rescinded a permit for a proposed Albany processing facility on environmental grounds, potentially delaying and/or halting the movement of Canadian oil sands to market. The roadblock is illustrative of the innumerable transport struggles that Alberta producers are running into. Separately, a large protest took place in St. Paul, MN on June 6, opposing the Alberta Clipper pipeline – another Canadian-US cross boarder oil sands pipeline. Brad Gill, a top official for New York’s Independent Oil & Gas Association said that the withdrawal of the Albany permit sends the wrong message. “The oil and gas industry does not view the state of New York as being open for business as advertised,” Gill said.

Meanwhile China has seen its oil imports seesaw back and forth in recent months. In April, China imported a record 7.37 million barrels per day, but that figure was slashed by nearly a quarter the following month. In May, China only imported 5.47 million barrels per day, as an unusually large volume of refining capacity was offline for maintenance.

The oil markets can deal with an off month, but there are growing signs that China may not live up to its hype as an insatiable consumer of petroleum products. Tepid economic growth is cutting into demand growth scenarios for Chinese oil consumption, a worrying sign for those that are long on oil prices. Softer Chinese demand in the months ahead will mean there will be a whole lot more oil sloshing around than there otherwise would have been, potentially prolonging the period of weak oil prices. Related: Concerns Over Earthquakes Spread To Texas

In Iraq there is a glimmer of progress to report amidst a seemingly unending wave of chaos. Iraqi forces have apparently retaken control of Baiji city, which of course is (was) home to Iraq’s largest refinery. The refinery had a throughput capacity of 200,000 barrels per day – or one-third of Iraq’s overall output of refined products – and has been the target of ISIS militants since their initial advance in June 2014. But in late May, ISIS set the refinery ablaze as they were chased out, crippling the plant indefinitely. Still, the Pentagon reported on June 8 that Iraqi forces have retaken control of the city, although without the refinery the achievement is a little less important.

Evan Kelly

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